Lessons from Africa (Part Two)

China’s investment in Africa has useful lessons for Pakistan. In the second part of Lessons from Africa, Asad Abbasi takes a closer look at how Chinese investment has affected Africa and who has benefited from this investment.

Africa is a continent with more than 50 countries, each with different legal and political institutions, so comparison with Chinese investment in Pakistan— at first sight— does not seem appropriate. Yet, the impact of Chinese investment in Africa holds potentially important lessons for the South Asian nation.

In 2003, Chinese Academy of Geological Sciences warned that China is facing resource shortages. The report recommended that in order to meet current and future demand, China need to import additional three billion tons of iron, half-billion ton of copper and hundred million tons of aluminium in next twenty years.

It was around this time that China’s interest in Africa re-emerged. In 2002, trade between China and Africa was £10bn, by 2013, it was more than £170bn. China has become ‘Africa’s largest trading Partner’.

Though trade represents large proportion of China-Africa relations, it is Foreign Direct Investment (FDI) that acts as a guide for shifts in global investment. It is therefore interesting to study China’s investment in Africa. According to Premier Li Keqiang, China will raise its Foreign FDI in Africa to $100 billion by 2020. China has diversified its investment in Africa since 2003, but significant portion has always been channeled into fulfilling the demand for resources. Furthermore, the recent slowdown in Chinese economy has brought a reduction in overall investment from $3.54bn to $568m— declines of 84 percent compared to last year. However, investment in the extractive industry, during the same period, has doubled. After all these years, who in Africa has benefited from China’s investment?

China’s need for resources, according to Ha Joon Chang, is the biggest factor of high growth rates in Africa since 2000. During this time, there has been a hundred percent increase in number of millionaires living in Africa. However, the number of people living under poverty line (less than $1.25) have also increased from 411.3 million in 2010 to 415.8 million in 2011- a difference of 4.5 million people (equivalent of the entire population of New Zealand)
According to Nick Dearden, director of Global Justice Now, African ‘development’ has made the rich richer, while the poor have remained poor. He points out that African development has raised growth and poverty together, because the benefits of increasing wealth are ‘gobbled up by super rich’. A World Bank report has also acknowledged that inequality in ‘unacceptably high’ and warned that inequality is unlikely to subside anytime soon. One of the main problems is the lack of proper distributive institutions. According to Joseph Stiglitz, countries like Tanzania, Ghana, Uganda, Mozambique, need to build ‘institutions, policies and laws needed to ensure that resources benefit all of their citizens’.

Due to the high levels of Chinese FDI, African markets are now pegged to China’s internal demand. Any fluctuation therefore causes job losses and uncertainty in many African countries. Take Zambia, for example. Copper accounts for 70% of Zambian exports, so the recent decline in Chinese demand means that price of copper has halved since 2011. As a response, Glencore plc, Swiss mining company, announced to halt the production of copper for 18 months at Mopani mine, resulting in a 26 percent reduction of copper production and around 4000 job losses.

Furthermore, due to the decrease in copper exports, the Zambian Kwacha dropped 4.6 percent against the US dollar. Commodities are priced in US dollars and therefore decrease in Zambian Kwacha against the dollar has increased the prices of commodities across Zambia.

So what does the story of Chinese investment in Africa tell us? Yes, there has been rapid growth and rise in employment. But it is accompanied by rise in high inequality, fluctuations in employment and only a small increase in actual wages. Can this be classified as ‘economic revolution’?

China’s investment in Africa raises questions around whether the euphoria for CPEC is justified at this point in time. It highlights that for economic stability, government cannot be reliant on one industry; it shows that growth does not necessarily mean development. It also indicates that when economic opportunity arises, particularly in the form of substantial FDI, the government has to take steps to ensure that the benefits are distributed as equally as possible.

There are policies that Pakistani government can implement that would increase the likelihood of equitable distribution. For example, Pakistani government could impose a windfall-profit tax on Chinese corporations extracting minerals in Pakistan and channel the income into developmental projects. Windfall profits are ‘sudden and massive profits’ that can happen due to changes in price. The profits depend on the fluctuation in prices and therefore cannot be ‘foreseen’ by concerned parties.

But the argument against imposing such a tax is that windfall tax policy is counter-productive. At present, Pakistani government should do everything to ‘attract’ Chinese investment. By imposing a tax on profit, Pakistani government will scare the incoming investment. This objection, though, a good political tactic, has, a bad rational basis. With windfall profit tax, additional tax will be result only of sudden and massive profit. If there is no additional, massive and unforeseen profit, then there will be no additional tax. How will this scare Chinese investment?

This is just one policy. If Chinese FDI injection is to support Pakistan’s development, it is essential to get the policies right, no matter how cumbersome they may seem in the face of the current euphoria.